Multiple regulation levels needed for responsible entities

by
WP |
08 Jan 2013

Regulators need to recognise there are different categories of funds management, and treat them differently

Despite the collective investment collapses over the past five years, managed fund investors are going into 2013 with little more regulatory protection than they had at the start of 2007, says Harvey Kalman, head of corporate and fiduciary services at Equity Trustees Limited (EQT).

“Most financial services’ tightening of regulations have been focused on financial planners, although there have been some moves towards strengthening regulations for responsible entities (REs),” said Kalman.

He believes two or three levels of regulation are needed for REs, based on the size of the institution behind the fund, the independence of the RE, and the complexity of the assets that a fund is allowed to invest in.

“Such an approach does not have to make regulations more complicated; however it increases the likelihood that, in the event of a fund running into problems, there is someone left standing to return money to investors. It will also reduce the possibility of malpractice.”

Kalman said different regulation would also mean new players in the funds management industry were not strangled at birth – ensuring that a vibrant industry, offering wide investment opportunities and access to new managers, survives.

“There needs to be recognition that a ‘one size fits all’ RE regulatory approach will have some flaws,” said Kalman.

“We also need to recognise that investment products, and financial instruments generally, are now much more complex than they were when REs were introduced in 2000.”

Boutique managers are now playing a significant part in the funds management industry, bringing in new investment approaches, generally good investment results, and a broader base to the industry.

Kalman said the steps to strengthen REs that are currently being proposed had the danger to inhibit start-up managers.

Most funds today are also able to invest in structured financial investment regardless of their size.

“Those that do so should have a higher level of investor protection requirement than those that offer uncomplicated “vanilla” products," said Kalman.

“In my view, the regulators need to recognise there are different categories of funds management, and treat them differently.

“Each needs different regulatory consideration in a way that does not reduce investor options, but at the same time helps protect them.”

Kalman said that one option was to mandate the use of independent REs for small funds that use financial instruments.

“This is an approach that many boutique managers are moving towards anyway, because of the administrative and compliance benefits it brings.

“Introducing different regulatory ‘tiers’ depending on factors such as the fund manager size and type of investment, can be easily instituted under the existing licencing mechanism,” Mr Kalman said.